One month to go until new mortgage rules kick in

The UK mortgage industry will see the largest change to regulation in a decade on 26 April 2014, when the Mortgage Market Review (MMR) changes are formally implemented.

The rules, which are being introduced to reinforce consumer protection, are overseen by the industry regulator, the Financial Conduct Authority (FCA).With a month to go, lenders, brokers and consumers will be noticing changes in mortgage applications, and the ongoing administration of mortgage accounts, as lenders begin to switch over to the new rules. While the rule changes are wide-ranging and detailed, the key points are that:

– There will be a clear distinction between mortgages sold on an “advised” and on an “execution-only” basis, with most future sales and variations being advised, requiring staff to be trained and qualified to the required standard to give advice.

– Procedures for giving advice to borrowers will be more detailed. Firms will need to ask more questions to determine what mortgage product is suitable, taking into account individual needs and circumstances, so mortgage interviews could take longer and may even be split into two separate interviews.

– As well as buyers, remortgagors will also find that the process has changed. People wishing to make changes to their existing mortgages will also be affected, and may be required to go through an advised process and a new affordability assessment.

– The new rules reinforce measures to assess the future affordability of mortgages, as well as initial payments. Lenders will apply an interest rate “stress test”

– to ensure that the loan would still pass the affordability requirements even if the borrower’s payments were higher. Lenders will also have to consider the impact of known future changes, such as retirement or redundancy, when assessing affordability.

– Lenders will have to make a more detailed assessment of the borrower’s expenditure, including normal spending as well as credit card and other loan repayments. Borrowers may need to produce more evidence of their spending habits and other commitments than before.

– It will still be possible to take out an interest-only mortgage, but this is likely to remain a niche product. Customers wishing to take out an interest-only loan must demonstrate a credible repayment strategy to repay the loan at the end of term and any costs associated with that strategy must be taken into account in assessing affordability.

To help consumers prepare for the changes, the CML has been working with the Money Advice Service, which will publish online guides in April to explain how applying for a mortgage works under the new system.

The CML will work with lenders to assess the impact of the new rules and minimise any disruption while they are put in place. Reassuringly, a recent FCA survey found all firms planning to conduct mortgage business – brokers as well as lenders – will be ready to implement the new rules on the 26 April. Some lenders have already announced their MMR lending criteria and have chosen to implement certain aspects of the rules in advance of 26 April. Nevertheless, the sheer scale of the changes to firms’ systems and processes may affect transition to the new rules in the short term. The CML will work closely with the FCA and lenders to ensure any implementation concerns are minimised.

Commenting on the MMR implementation, Paul Smee, director general at the CML, said:

“The introduction of MMR regulation will bring the largest change to how the mortgage market works in over a decade. The industry has shown that it is ready, and we anticipate a smooth transition into the new framework. We hope and expect the new rules will provide a robust and stable framework for the long term.”

“We hope that any transition issues can be managed in a way which minimises their impact on the borrower, and the CML is ready to assist the FCA in this task.”

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